More on CashCall; The Primary/Secondary Rate Difference; Higher Agency Fees Will Hurt Agency Production
US household net worth was
$77 trillion as of the end of Q3, up $1.9T Q/Q. In the third quarter, the
value of corporate equities and mutual funds owned by households expanded $917
billion and the value of residential real estate owned by households increased
about $428 billion.
As a byproduct/result, household "deleveraging" is leveling off. With the
recovery in household wealth that has taken place over the past two years, the
personal saving rate is now better aligned with its historical relation to
wealth. Household mortgage debt increased at a 0.9% rate, the first increase
since the recession, which helped to flip the household sector from a net
lender to a net borrower for the first time since 2007. (Read More...)
And how is this for
news that will hurt the eminent domain movement: in Texas, less than 5% of
mortgage holders are underwater on their home loans.
a very important clarification to yesterday's Franklin American news
about ceasing jumbo fixed rate locks, the announcement came from FAMC's
correspondent division. To the best of my knowledge FAMC's wholesale channel is
still offering it. Brokers everywhere hope that this continues, although due to
the constraints of implementing Appendix Q it is anyone's guess whether or not
that will happen.
is not necessarily good. Rumors continue to swirl of major changes in the
residential lending sector, with the latest set focused on Impac's retail
channel. In Utah, Zions Bank announced that the Volcker Rule will impact
it to the tune of -$387 million. The bank can no longer keep trust-preferred
collateralized debt obligations issued by banks and insurers until they mature.
of course we all heard about the CFPB
& CashCall. I received this note from an astute reader: "With respect
to CashCall, the most interesting thing I saw was their attorney saying the
charges are unfounded. Did you see that? Happen to see who their attorney is?
It's Neil Barofsky with Jenner & Block. If the name sounds familiar, it's
because Barofsky was the Special
Inspector General for the TARP program. I believe it was he who was charged
with finding & prosecuting TARP fraud. Kinda funny change of jobs, from
policing TARP recipients to defending pay-day lenders." Here is a Bloomberg
article that mentions Neil along with the details of the suit." And speaking of CashCall, who can forget
this Gary Coleman ad.
days, the best thing about my job is the chair that spins." Yesterday could
have been one of those days. We may
recall that the industry is going to do about $1.7 trillion this year in
business. Not bad - especially when compared to 2014's estimated $1.2 trillion
- a 32% drop. (Purchase business is expected up, but refi biz is expected
to drop almost 60%.) One has to wonder if
those industry estimates incorporate the gfee and loan level price adjustment
hits announced recently.
news has not quite filtered its way down to originators and Realtors, but
Capital Markets crews everywhere are aghast at the LLPA (loan level price
adjustment) changes in store April 1. I should clarify that: companies focused
on non-agency or government (FHA/VA) loans are taking the news much better. The upfront fee hike takes mortgage rates
for impacted borrowers close to FHA execution levels. Most do not expect
the LLPA adjustment to drive a substantial portion of the PMI's industry's
volume to the FHA, but on the margin conventional loan pricing inclusive of PMI
is substantially less competitive. Will we see the intended influx of private
capital, or banks focusing on portfolio product?
quick cocktail napkin calculation shows after
these changes a borrower with 720-739 credit putting less than 15% down will be about 1.75pts (.10% in rate and another 1.25 in LLPA's) more than they
would today. I received this short note from a broker on the Atlantic Coast:
"Since over 95% of the industry is Fannie, Freddie, and government, this is
very bad for the industry, and more importantly the borrower. It is amazing
that no one is suing for disparate treatment by this independent agency. I
will not say it is sweeping discrimination, but if the government took the position that banks/bankers cannot price
based upon risk assessment, then what makes Freddie & Fannie better
qualified? It has been my experience, and observation of government
employees that, regardless of the party in power or the best intentions the
government, they are grossly under-qualified to make such financial decisions."
a broader look at things has some wondering if, given the impending change in
leadership at the FHFA (DeMarco to Watt), this LLPA change will be rescinded or
decreased. You can bet that the MBA and NAR will point out the huge negative
impact on borrowers, and on housing. And let's not forget the QM versus non-QM
question, yet another factor in possibly decreasing mortgage credit
availability to a significant segment of borrowers. Focusing on the LLPA
changes, the most impacted borrowers will be those with relatively high FICOs
(680-759) and LTVs above 85%. This represents a fairly significant portion of
the borrower universe that utilizes PMI as conventional rates have been
competitive relative to FHA rates for this subset of loans. The increase in fees goes into effect for
loans delivered starting April 1, 2014 - but one can bet that due to rate lock
periods, the changes will be implemented on rate sheets soon.
Dave Stevens, president of the Mortgage Bankers Association,
said, "What had been an exercise by regulators to systematically attract
private capital into the mortgage market has now turned into an attempt to
shock private capital back into the system. The new up-front risk-based pricing
grid means that fees will increase the most for borrowers in the heart of the
home-purchase market, those who have credit scores between 680 and 759 and who
are putting down between 5 and 20 percent." Here are the actual announcements for Fannie
so there will be higher fees on loans to
borrowers who don't make large down payments or don't have high credit scores.
But as any lender knows, this group that represents a large share of home
buyers, and we know that lenders will not absorb the hit. Fannie and
Freddie currently back about two-thirds of new mortgages, and we'll certainly
see that drop when these price changes enter rate sheets. We're already seeing
jumbo (we're going to have to start saying "non-agency"!) retail rates better
than correspondent conforming rates in many markets. This will certainly
continue, since non-agency loans don't have explicit gfees. But historically,
"private capital" has never accounted for a huge percentage of the overall
market. The higher fees will make conforming mortgages even more expensive than
question is often asked, "What could
happen with housing in 2014?" Jeff Lewis, Senior Portfolio Manager of TIG Advisors (a hedge fund) -- $1.8
billion AUM -- Securitized Asset Fund,
writes, "Homebuilder stocks have tended to be fairly good long-term predictors
of future housing price movements. S and
P Homebuilders index is down negligibly this year despite double digit Housing
Price Appreciation and strong revenue growth year over year for the component
homebuilder stocks. Previous turning points for the homebuilders (a peak in
late 2005 and a bottom in late 2008) anticipated underlying HPA trends by a
year or two, but were ultimately correct in predicting momentum shifts for
housing. In addition, the National Association of Realtors Housing
Affordability data hovered around a record for cheapness in the vicinity of 200
for a couple of years before the housing market started to see price increases.
We are now about halfway back to re-tracing to more normal historical levels of
affordability. Given the likelihood of mid-high single digit gains next year
that would be accompanied by somewhat higher rates, we could find ourselves in
a fairly priced market, in terms of affordability by the end of 2014. To move
from fair to expensive would require further stimulus, either from employment
gains or government policy. So, the end of the boomlet could be in sight in
If you drew the
Secondary Markets guy in your banks "Secret Santa" pool, and he already has a
stock pile of ketchup packets from McDonalds in his top desk drawer....fear not.
Print out the New York Federal Reserve's
"The Rising Gap between Primary and Secondary Mortgage Rates
and call it good. In a very well written article the
NYFR present a more detailed calculation of originator profits and costs, and
then attempt to explain their rise by considering a number of possible factors.
Their final conclusions, drawn by empirical data analysis, are a good read. The widening gap between primary and
secondary mortgage rates over the period 2008 to 2012 was due to a rise in originators'
profits and unmeasured costs, or OPUCs, as well as increases in g-fees. The
magnitude of the OPUCs is influenced by MBS prices, the valuation of servicing
rights, points paid by borrowers, and costs such as those from loan putbacks
and pipeline hedging.
(Read More: Closer Look Gap Between Primary and Secondary Mortgage Rates)
And speaking of secondary marketing, so what's so important
about "TIC"? Well, the Treasury International Capital Data which tracks the
flow of Treasury and agency securities, as well as corporate bonds and
equities, into and out of the United States, is a closely watched indicator by
many. When your uncle on Christmas Eve (is it that time already?) says, "Japan
basically owns us," he's actually referring to data being recorded in TIC. The
July TIC data report released recently showed that overseas investor holdings
of agency MBS increased by $3 billion in July versus declines of $16 billion
and $19 billion in June and May, respectively. This modest increase in overseas
investor holdings of agency MBS occurred following a $68 billion decline. More
importantly, China's holdings of agency bonds have increased significantly
while Japan continued to reduce its agency bond holdings in July. See, your
uncle is wrong....its China.
One can barely watch or listen, not
that I watch or listen much, to all the yammering on the financial news
networks about the Fed meeting results today, and the possible scaling back of
security purchases by the NY Fed. Yes, it is going to happen. And let's
face it: if they do it, it is because they believe the economy is strong enough
to handle it. Economists with Deutsche Bank said they expected the FOMC to
announce $10 billion in tapering, but in Treasuries only.
rates did just fine Tuesday. Agency MBS prices improved about .250, and the
10-yr yield closed at 2.84%. Today there is plenty to talk about: the MBA's
application index, Housing Starts and Building Permits, and a $35 billion 5-yr
note auction. And then we'll have the FOMC's Statement and release of the Fed
Summary of Economic Projections at 2PM followed 30 minutes later by the post
meeting press conference by Chairman Bernanke. Today, given the pricing turmoil
by the agencies, the last thing capital markets staffs need is interest rate volatility.
In the early going, we're nearly
unchanged from Tuesday's closing price and yield levels.
Something that makes fun of both LOs and Realtors? I couldn't resist: http://theresource.tv/archives/loan-officer-stereotypes-a-spoof/.